Which company is biggest? A primer on corporate valuation

What's the world's largest technology company? The answer depends on which …

Update:When the markets closed on August 10, 2011, Apple ended up as the company with the largest market capitalization in the world ($337.17 billion), surpassing Exxon Mobil ($330.88 billion). This generated a new flurry of discussion about what "market cap" really means, so we felt it appropriate to re-publish our primer from earlier this year on the different ways to judge corporate valuation. Please note that we have not updated the data in this feature (originally published in February 2011), but we think the principles discussed in the piece are worth highlighting.

So the order came down from the Orbiting HQ, and I'm here to make it happen:

Make people a little more smarter than "DURR HUGE MARKET CAP DURRR!"

The data that follows was culled from Capital IQ, a division of Standard & Poors, is current as of February 4, 2011, and reflects results over the last 12 months unless otherwise noted. Let's start with the simplest metrics.

Market cap

Rank

Company

Market capitalization ($ billions)

1

Exxon Mobil

414.2

2

Apple

318.8

3

BHP Billiton

261.1

4

PetroChina

259.0

5

Microsoft

233.2

16

Google

195.1

Measuring companies by market cap has a couple of advantages:

It's really easy to talk about, and reported by any data provider worth its salt

Cap sizes make for sexy sound bites

Since they often change very quickly, cap size metrics generate a lot of easy news stories.

It's also a perfectly respectable metric in some cases. What we're looking at here is the total value of all stock in the company, assuming that all of it was sold at the current market price. The market cap is, of course, only of theoretical importance, because actually selling every share all at once would make a tremendous impact on the stock price itself, thereby changing the total value very quickly.

There is no single driver of this value. In the end, it's the net effect of millions of buyers and sellers agreeing to a fair value for the shares in an auction-style open market. Some of those investors might arrive at their fair prices by estimating future cash flows, others look more closely at dividend yields or rates of earnings growth, and some don't do any math at all and just buy or sell because some expert told them it was a good idea.

Looking at the top five list above, you'll notice that ginormous producers of oil and other natural resources tend to do well by this metric. Exxon and PetroChina literally provide fuel for two of the largest economies in the world and BHP Billiton sells the materials used for building those economies. Investors clearly see some value in that.

Apple is number two by virtue of its highly profitable iPhones and iPods. Few companies can match the unique blend of big sales, wide profit margins, and rampant growth that Apple sports today.

In the summer of 1999, Microsoft's market cap was an absolutely massive $474 billion for a short while, and the company looked ready to challenge the mythical trillion-dollar level in short order. Windows 95 and Microsoft Office took the company that far, and then bad things started to happen. Today's cap is less than half as large, as Mr. Softy has suffered numerous missteps over the last decade. Rather than being inflated by promises of growth, Microsoft looks and acts like a safe but boring income-and-value stock now, complete with dividends.

You could have bought Google shares at today's prices more than three years ago. It's valued like a moderate-growth stock rather than the habitual outperformer it actually is, reflecting a lack of investor confidence in a business model largely based on online advertising sales. The dot-com crash is ancient history, but it has clearly left some scars.

The market cap can't tell you the economic value of a company, nor is it exactly a measure of what the company is worth. It's a theoretical stock-market measure; while both entertaining and sometimes useful, we need to look at a range of other metrics to judge the "size" of a company.

Enterprise value

Rank

Company

Total enterprise value ($ billions)

1

General Electric

582.1

2

Exxon Mobil

427.1

3

PetroChina

346.3

4

Apple

289.4

5

American International Group

267.8

18

Microsoft

202.0

30

Google

163.6

Enterprise value is a cousin of the market cap, as you might have guessed form the high number of repeat performers on this list. It's the market value of the company, minus cash balances and plus debt. It's what another company would have to pay in order to make an acquisition. It's another theoretical construct, and actual buyouts tend to command something like a 20 percent to 50 percent premium on top of the enterprise value. You have to convince the current shareholders that the deal is better than simply hanging onto their shares as the company goes about its business all alone.

Lots of cash moves you down on this list, because the hypothetical buyer basically buys a wallet with money inside. Conversely, high debt makes you expensive because the buyer would have to shoulder that load.

So Apple drops a couple of notches thanks to bulging bank accounts and no debt, Microsoft falls all the way to number 17 for similar reasons, and Google looks downright inconsequential from this angle when you're used to thinking about Big G as a top-20 name (That mindset will change very quickly if you keep reading, by the way). All of our tech darlings have substantial cash accounts and little or no debt. More on that when we start talking about cash balances.

The big movers here are General Electric and AIG. The technical term is "leveraged balance sheet," meaning that these companies have loaded up on debt in order to make bigger moves in their respective markets. It's a popular way to juice up your growth when times are good and loans are cheap, but works less spectacularly when creditors ask for high interest or come a-knocking to look for repayments. Banks, insurance companies, construction firms, and expanding restaurant chains do this all the time, but tech giants rarely go down this route. BHP Billiton fell off the top-five list because it isn't neck-deep in debt, but don't worry: the mining giant slides in at number nine, right behind Shell and ahead of Toyota.

In many ways, you really don't want to lead the pack in this particular competition. General Electric is the most expensive potential buyout in the world because it's saddled with $479 billion—nearly half a trillion dollars—in long-term debt and only $123 billion of cash. It almost makes you wonder where GE's profits are going, until you remember that the conglomerate's largest division is the GE Capital banking operation. GE behaves like a large bank because it is one. But that debt load still looks ugly.

I do have one question though: since when did "big" equal "good"? Or to put it another way, whenever is it advantageous for a consumer when a company continually gets larger?

Many people think "big" = "winner," and in some ways, that might be correct. It's often the chant of fanboys, however, so in the proud Ars tradition of bringing context, here's this article. We thought we would run it again in case people wanted to read a basic primer on the topic. Glad you liked it!

I do have one question though: since when did "big" equal "good"? Or to put it another way, whenever is it advantageous for a consumer when a company continually gets larger?

Many people think "big" = "winner," and in some ways, that might be correct. It's often the chant of fanboys, however, so in the proud Ars tradition of bringing context, here's this article. We thought we would run it again in case people wanted to read a basic primer on the topic. Glad you liked it!

I didn't see it the first time, but in light of the recent changes amongst the big dogs it's timely to read.

On point of it being an Apple story, I haven't been a Mac user since 2001 but it is amazing to see what they did with small gadgets which they were never able to do with their full systems. To that they certainly deserve credit.

Many people think "big" = "winner," and in some ways, that might be correct. It's often the chant of fanboys, however, so in the proud Ars tradition of bringing context, here's this article. We thought we would run it again in case people wanted to read a basic primer on the topic. Glad you liked it!

I would have liked it better if you had updated it with the latest facts and figures. Seriously, how much trouble is it to be accurate?

Many people think "big" = "winner," and in some ways, that might be correct. It's often the chant of fanboys, however, so in the proud Ars tradition of bringing context, here's this article. We thought we would run it again in case people wanted to read a basic primer on the topic. Glad you liked it!

I would have liked it better if you had updated it with the latest facts and figures. Seriously, how much trouble is it to be accurate?

It is accurate, within in the limits that the article author lays out.

Ooooohhh, you mean you would have rather they used the more recent data that shows Apple ahead of MS in a single metric that isn't so here. Gotchya.

Many people think "big" = "winner," and in some ways, that might be correct. It's often the chant of fanboys, however, so in the proud Ars tradition of bringing context, here's this article. We thought we would run it again in case people wanted to read a basic primer on the topic. Glad you liked it!

I would have liked it better if you had updated it with the latest facts and figures. Seriously, how much trouble is it to be accurate?

The point of the article is to explain the different ways in which a company is judged. The actual numbers and rankings don't matter to the goal.

Also, MS'es dev workforce is famously bloated, and of course, you have the massive duplicate development efforts within MS (e.g., Kin, WM6, WP7 were all being developed at the same time).

Untrue. WM6 and WP7 are the same dev group, except for sustained engineering, Kin was done by a very small team by all acounts. The fact of the matter is that they simply develop far, FAR more software products than Apple does, and the numbers do not reflect Apple's manufacturing workforce because that's been ODM'd to Compal, Foxconn, etc. Also, Microsoft has a very large, dedicated Enterprise sales force to sell things like SQL, Exchange, System Center, etc to large companies. Apple ignores that market entirely, which saves them from having to hire account teams, specialists, etc.

They are quite simply VERY different companies with VERY different business models that require VERY different hiring and employment paterns.

Nice to see the oil companies are raking in the dough. Doesn't that trend scare the crap out of anyone else?Those trends will just send the oil companies continually to the top, unless the US changes its oil dependence soon.

Hopefully someday soon we will see solar companies moving toward the top of these rankings and creating millions of jobs in the US.

So will the American media now start referring to Apple as the Cupertino giant in the same vein as it consistently refers to the much smaller Google as a giant from Mountain View. By the way, Apple's recent business strategies reflect that of a demonic giant but will the American media which fed on its Advertising & PR budget of $691 million in 2010 project a true picture of the company.

The quote about value is referring to the Share Price. The market cap is easy to calculate at any given moment, but the share price is highly variable in real terms. The article clearly makes the point that if you were to actually attempt to buy the outstanding shares at the share price, that very action would cause the share price to change. Due to this (and all of the other drivers of share price), the market cap is not a real-world valuation of anything. That is not to say it isn't a useful metric, it just can't be taken at face value.

The point of the article is to explain the different ways in which a company is judged. The actual numbers and rankings don't matter to the goal.

The point of the article, in both iterations, is to point out how to value Apple vs other companies using a variety of metrics. It is, therefore, incumbent on Ars to ensure they accurately report the actual standings using those metrics, not the standings from 6 months ago.

If the article was just to explain the different methodologies, then they didn't need any references to charts or comparisons. Even if they had just redacted those references, instead of just cutting and pasting the thing into a new post, the article would have been improved. It's the height of laziness to reprint something with nothing more than a commentary that that is what you're doing. Why even bother? A link in the Etc post would have been sufficient and just as dated.

The point of the article is to explain the different ways in which a company is judged. The actual numbers and rankings don't matter to the goal.

The point of the article, in both iterations, is to point out how to value Apple vs other companies using a variety of metrics. It is, therefore, incumbent on Ars to ensure they accurately report the actual standings using those metrics, not the standings from 6 months ago.

Companies don't report their sales figures as often as you seem to think. Annual returns are more than enough since anything else is going to be unaudited and have more room for error.

I

Quote:

f the article was just to explain the different methodologies, then they didn't need any references to charts or comparisons. Even if they had just redacted those references, instead of just cutting and pasting the thing into a new post, the article would have been improved. It's the height of laziness to reprint something with nothing more than a commentary that that is what you're doing. Why even bother? A link in the Etc post would have been sufficient and just as dated.

Turns out examples are useful? You're reading into it too much, and there's plenty of companies worth more than Apple.

There's a comprehensive character to this article that should have earned it Feature Story status. A shame. Well done Mr. Bylund and thanks.

What's not to like? The fact this was actually put in Infinite Loop. I can't even start to understand (in fact I don't want to understand) what's behind this choice. If not for the quality of what I read, I'd say this article only purpose was to server as troll bait.

Fantastic article. Well written. I can't claim anything for accuracy as it was more of a primer for me.

I do have one question though: since when did "big" equal "good"? Or to put it another way, whenever is it advantageous for a consumer when a company continually gets larger?

It certainly isn't ironclad, but being big suggests that you've persuaded consumers to part with a lot of money, which in turn suggests that you're providing those consumers with a valuable good or service. In this view, being big isn't good in itself, but rather is a consequence of being good.

Another point is that being big can allow for certain large investments to improve your product that might not be possible if you're small. For example, Apple is launching a large and elaborate cloud data synching service which is being paid for out of the margins of hundreds of millions of devices. If Apple was only selling a few million devices per year, would they be able/willing to make that investment in their product?

And finally, there's good old economies of scale. Wal-mart being the legendary example of the kind of efficiency that buying and selling in massive quantities can bring. Part of those efficiency gains are usually passed on the consumer in lower prices, though that much market power can also bring negative consequences (local business, labour exploitation, etc.).

Microsoft employs twice as many workers as Apple? Surprising, I would have expected it the other way around.

HP employs over 4 times as many. But then, they make HW, SW, calculators, have HP labs etc etc etc.

Even Intel employs about as many people as Microsoft ... but then they do have multiple high-volume fabs as well as assembly and test sites to operate for CPUs, motherboards, SSDs and various other components.

And as it stands, I think the article missed one of the largest railway employers in the world - Indian Railways. According to various sources (one source below), they employ anywhere between 1.3 to 1.6 million people ... they'd beat out Russian Railways either way.

The point of the article is to explain the different ways in which a company is judged. The actual numbers and rankings don't matter to the goal.

The point of the article, in both iterations, is to point out how to value Apple vs other companies using a variety of metrics. It is, therefore, incumbent on Ars to ensure they accurately report the actual standings using those metrics, not the standings from 6 months ago.

"How" to value something is not the same as "what" its value is at any given moment. You, and any other intelligent person, can make do with the article as is.

Anyway, the data wasn't updated nor is it going to be. We had an old article we thought people would appreciate, and so we bumped it with an explanation. Cheers.

Actually it's the price of a share of last trade. If you're willing to buy XOM at $500 per share, then there will be a person who will sell it to you. In addition, if that sale happens as the last trade of the day, it will be the basis of the calculation of the close share price and close market cap.